Portfolio Manager’s Monthly Update – November 2018

November 8, 2018

Dear Partners,

Oil prices reversed trend after many weeks of climbing. During October, both Saudi Arabia and Russia increased production to levels that the market believed would compensate for any potential shortages created by U.S. sanctions on Iran.  The administration deserves some credit for pushing for lower oil prices, but the market action we felt in October was difficult, to say the least.

For some time, we have been experiencing normal buildup of market optimism, on a number of fronts. There has been euphoria about the growing economy and historically low unemployment in America. The run-up in oil prices was built on the realization that worldwide investment in the energy industry has not been sufficient to replace current levels of production constantly being reduced by natural depletion.  This much is true, but inventory levels do fluctuate with market sentiment.  We believe the current market correction in stocks, which continues in November, should soon run its course, and the current strong economic statistics warrant positive sentiment.

To offer some perspective on our strategy, the volume growth we identified in the Permian Basin as early as 2014 continues its momentum.  Recent price discounts in the Delaware Basin have been as high as $15 per barrel below stated WTI because of take-away constraints. It is public knowledge that sufficient extra capacity will be in place by the end of 2019 for all producers to add major volumes and the easy transport should diminish discounts. We think shortages of take-away capacity could happen periodically as volumes continue to rise.

New volumes from the Permian may risk putting pressure on prices in the future. Consequently, U.S. shale production would become the worldwide swing producer and could earn a growing share of global business. We feel we are positioned to benefit from volume growth for years to come.

Dana McGinnis & Mission Advisors